Category Archives: Vox column

Vox column: Re-evaluating the result that the costs of ‘leaning against the wind’ exceed the benefits

Vox column: Re-evaluating the result that the costs of “leaning against the wind” exceed the benefits, January 24, 2017.

The IMF and the Federal Open Market Committee have both suggested that the costs of ‘leaning against the wind’ exceed the benefits. This Vox column responds to claims that the results of my research backing up this conclusion could be overturned. It argues that the alternative assumptions necessary to overturn the result are unrealistic, and that the finding that the costs of the policy exceed the benefits therefore seems to be robust.

The column summarizes “How Robust Is the Result That the Cost of “Leaning Against the Wind” Exceeds the Benefit? Response to Adrian and Liang.”

Cost-Benefit Analysis of Leaning Against the Wind

Cost-Benefit Analysis of Leaning Against the Wind,” Journal of Monetary Economics 90 (2017) 193-213. CEPR Discussion Paper DP11739, NBER Working Paper No. 21902. A previous version, with the longer title “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”, was published as IMF Working Paper WP/16/3, January 2016.

Link to published version (Elsevier, free download until Oct 6, 2017)

Data and Matlab program

Vox Column


A simple and transparent framework for cost-benefit analysis of “leaning against the wind” (LAW), that is, tighter monetary policy for financial-stability purposes, is presented. LAW has an obvious cost in the form of a weaker economy if no crisis occurs and possible benefits in the form of a lower probability and smaller magnitude of (financial) crises. A second cost—less obvious, overlooked by previous literature, but higher—is a weaker economy if a crisis occurs. For representative empirical benchmark estimates and reasonable assumptions the result is that the costs of LAW exceed the benefits by a substantial margin. The result is robust to alternative assumptions and estimates. A higher probability, larger magnitude, or longer duration of crises—typical consequences of ineffective macroprudential policy—all increase the margin of costs over benefits. To overturn the result, policy-interest-rate effects on the probability and magnitude of crises need to be more than 5–40 standard errors larger than the benchmark estimates.

Vox column: “Leaning against the wind,” debt deflation, and the Riksbank

Leaning-against-the-wind monetary policy may lead to a Fisherian debt deflation, since it may lower prices below the anticipated level and therefore raise real debt above what was anticipated. This is what the Riksbank has done by keeping average inflation significantly below the inflation target for a long period. This has caused household real debt to be substantially higher than it would have been if inflation had been on target. Link to Vox column.